Jack Townsend offers this blog on Federal Tax Crimes principally for tax professionals and tax students. It is not directed to lay readers -- such as persons who are potentially subject to civil and criminal tax or related consequences. LAY READERS SHOULD READ THE PAGE IN THE RIGHT HAND COLUMN TITLED LAY READER LIMITATIONS. Thank you.

Friday, April 26, 2013

GAO Report Targets Strategies Other than OVDP (4/26/13)

The U.S. Government Accountability Office (GAO) has released a report titled Offshore Tax Evasion: IRS Has Collected Billions of Dollars, but May be Missing Continued Evasion (GAO-13-318, Mar 27, 2013), here. The summary is here.

As of December 2012, the Internal Revenue Service's (IRS) four offshore programs have resulted in more than 39,000 disclosures by taxpayers and over $5.5 billion in revenues. The offshore programs attract taxpayers by offering a reduced risk of criminal prosecution and lower penalties than if the unreported income was discovered by one of IRS's other enforcement programs. For the 2009 Offshore Voluntary Disclosure Program (OVDP), nearly all program participants received the standard offshore penalty--20 percent of the highest aggregate value of the accounts--meaning the account value was greater than $75,000 and taxpayers used the accounts (e.g., made deposits or withdrawals) during the period under review. The median account balance of the more than 10,000 cases closed so far from the 2009 OVDP was $570,000. Participant cases with offshore penalties greater than $1 million represented about 6 percent of all 2009 OVDP cases, but accounted for almost half of all offshore penalties. Taxpayers from these cases disclosed a variety of reasons for having offshore accounts, and more than half of them had accounts at Swiss bank UBS.

Using 2009 OVDP data, IRS identified bank names and account locations that helped it pursue additional noncompliance. Based on a review of cases, GAO found examples of immigrants who stated in their 2009 OVDP applications that they were unaware of their offshore reporting requirements. IRS officials from the Offshore Compliance Initiative office said they have not targeted outreach efforts to new immigrants. Using information from the 2009 OVDP, such as the characteristics of taxpayers who were not aware of their reporting requirements, to increase education and outreach to those populations could promote voluntary compliance.

IRS has detected some taxpayers with previously undisclosed offshore accounts attempting to circumvent paying the taxes, interest, and penalties that would otherwise be owed, but based on GAO reviews of IRS data, IRS may be missing attempts by other taxpayers attempting to do so. GAO analyzed amended returns filed for tax year 2003 through tax year 2008, matched them to other information available to IRS about taxpayers' possible offshore activities, and found many more potential quiet disclosures than IRS detected. Moreover, IRS has not researched whether sharp increases in taxpayers reporting offshore accounts for the first time is due to efforts to circumvent monies owed, thereby missing opportunities to help ensure compliance. From tax year 2007 through tax year 2010, IRS estimates that the number of taxpayers reporting foreign accounts nearly doubled to 516,000. Taxpayer attempts to circumvent taxes, interest, and penalties by not participating in an offshore program, but instead simply amending past returns or reporting on current returns previously unreported offshore accounts, result in lost revenues and undermine the programs' effectiveness.

Why GAO Did This Study

Tax evasion by individuals with unreported offshore financial accounts was estimated by one IRS commissioner to be several tens of billions of dollars, but no precise figure exists. IRS has operated four offshore programs since 2003 that offered incentives for taxpayers to disclose their offshore accounts and pay delinquent taxes, interest, and penalties. GAO was asked to review IRS’s second offshore program, the 2009 OVDP. This report (1) describes the nature of the noncompliance of 2009 OVDP participants, (2) determines the extent IRS used the 2009 OVDP to prevent noncompliance, and (3) assesses IRS’s efforts to detect taxpayers trying to circumvent taxes, interests, and penalties that would otherwise be owed. To address these objectives, GAO analyzed tax return data for all 2009 OVDP participants and exam files for a random sample of cases with penalties over $1 million; interviewed IRS Offshore officials; and developed and implemented a methodology to detect taxpayers circumventing monies owed.

What GAO Recommends

Among other things, GAO recommends that IRS (1) use offshore data to identify and educate taxpayers who might not be aware of their reporting requirements; (2) explore options for employing a methodology to more effectively detect and pursue quiet disclosures and implement the best option; and (3) analyze first-time offshore account reporting trends to identify possible attempts to circumvent monies owed and take action to help ensure compliance. IRS agreed with all of GAO's recommendations.
For more information, contact James R. White, (202) 512-9110 or whitej@gao.gov.

JAT Comments:

This report specifically targets the two strategies clients consider as alternatives to joining the OVDP -- the "quiet disclosure" strategy (meaning filing some number of amended income tax returns and delinquent FBARs) and the "go-forward" strategy (meaning no correction of the past, but being squeaky clean on filings for the future.

From the practitioner perspective, these two alternative strategies should only be considered if (i) the taxpayer has no reasonable risk of criminal prosecution and (ii) the taxpayer has no reasonable risk of the willful FBAR penalty. This is where the taxpayer needs experienced counsel to make these judgment calls. The two issues are different sides of the same concept -- except in a criminal and civil context. I can't get into detailed analysis of that now, but diligent readers of this blog will have certainly picked up my thoughts on that by now.

If the taxpayer cannot reach BOTH of the conclusions in paragraph 2, the taxpayer should join the OVDP.

All of the taxpayers that I have counseled and who have implemented the alternative strategies have fit the profile in paragraph 2. So their risks, if I have correctly assessed the risks, are only the possibility of audit and accuracy related income tax penalty a nonwillful FBAR penalty upon audit that will be less than the inside the program costs (including most prominently the "in lieu of penalty" which has ratcheted from 20% to 25% to 27.5%). In effect, if audited, these taxpayers will achieve the same result as a favorable opt out. (This may not be strictly accurate; I understand that, on opt out, the taxpayers with the audit profile may be able to avoid the accuracy related penalty since they have filed amended returns that should qualify as Qualified Amended Returns; so the benefit foregone from the alternative strategy possible relief from the accuracy related penalty for the open years.)

The report concludes that some taxpayers have implemented the alternative strategies without the conclusions in paragraph 2. I can't speak to that, but I would just say that these taxpayers took a lot of risk in and, in effect, played the audit lottery with the downside risks greatly enhanced.

The report recommends that the IRS beef up its efforts to detect particularly the implementers of the strategies under the conditions set forth in paragraph 5. Of course, in both cases, audits will pick up additional revenue and some potential for penalties (just as any audit would), but larger revenue will be available from the taxpayers implementing the strategies under the conditions set forth in paragraphs 5. I do note, however, that the implementers of the strategy under the circumstances set forth in paragraphs 2 and 4 should be no worse off than had they joined the program and opted out (except with respect to QAR penalty relief). In a sense, therefore, they too are playing the audit lottery, but there appears to be no or little downside to doing so. And this is not the usual type of audit lottery because it only deals with the past and failure to correct the past; it does not deal with a situation involving a current compliance failure based upon the IRS's limited ability to detect and correct. The strategy of not correcting the past is based upon the fact that there is no legal requirement to file an amended return or, by extrapolation, a delinquent FBAR where the failure to file has already occurred. There may be prudential reasons to do so -- most particularly if it will avoid or mitigate the risk of criminal prosecution or avoid or mitigate the risk of draconian penalties. But, where, under the facts, those risks are not material, the law's "permission" not to correct the past may be a good strategy. (In this regard, I have said before that the IRS should sweeten the opt out penalty to be, for example, 1/2 the result that would be obtained on audit; that should attract many taxpayers with low risk profiles to join the program and thus come out noisily rather than implement either of the strategies to which GAO directs its comments.)

Addendum on 4/27/13:

Here are some of the key excerpts on the issues related to quiet disclosures and go forwards from the report itself (footnotes omitted):

IRS May Not Be Detecting Some Quiet Disclosures_____________________________________________________________________Quiet Disclosure DetectedAccording to the criminal information and plea agreement, a taxpayer held an account at HSBC Bank Bermuda. With the assistance of a business partner, the taxpayer arranged to have investment income in the amount of $297,816 wired to his business partner's secret account at UBS in Switzerland. From there, the taxpayer's share of the investment ($99,273) was transferred to his HSBC Bank Bermuda account. The taxpayer did not report this taxable income, or the interest income that accrued in the account, thereby avoiding $40,624 in taxes. Following the widespread media coverage of UBS's disclosure of account records to IRS, the taxpayer made a quiet disclosure by preparing and filing FBARs and amended Forms 1040 for tax year 2003 to tax year 2008, in which he reported the existence of the previously undeclared account. As part of the plea agreement, the taxpayer agreed to pay an FBAR penalty of $76,283, which was 50 percent of the high balance in the account. The taxpayer also faces up to 5 years in prison and a $250,000 fine.____________________________________________________________________

We identified 10,595 potential quiet disclosures, a number much higher than the potential quiet disclosures identified by IRS. In a series of Questions & Answers that IRS first released on February 8, 2011 to announce the 2011 offshore program, IRS reported that it had identified, and will continue to identify, taxpayers attempting quiet disclosures.29 In the Questions & Answers, IRS stated that it would be closely reviewing amended tax returns to determine whether enforcement action is appropriate. (See sidebar for one example of a quiet disclosure being detected.)

IRS officials told us that the Offshore Compliance Initiative office tested several different methodologies to identify quiet disclosures. First, IRS looked at amended returns during tax year 2003 to tax year 2008, the period covered by the 2009 OVDP, and removed any non-offshore related adjustments, such as filings status changes and additional exemptions. IRS also looked at amended returns with increased tax assessments over an established threshold during tax year 2003 to tax year 2010.

The effectiveness of a third effort was questioned by IRS. In this effort IRS compared taxpayers with a history of filing FBARs in non-secrecy jurisdictions between tax year 2003 and tax year 2008 who filed delinquent FBARs processed in 2009 involving a secrecy jurisdiction along with an amended return.

In 2012, a fourth effort, which was not designed to detect quiet disclosures, but to reroute misaddressed amended returns sent in by participants in the 2011 offshore program, was the most successful effort to find them.\

Together, these four efforts led to the review of several thousand tax returns. Of those, several hundred returns were identified as quiet disclosures. An IRS official told us that the tax returns that were identified as part of a quiet disclosure will be examined and that cases already examined had penalties assessed. Because they were quiet disclosures, the official said the taxpayers did not receive the reduced offshore penalty.

Given the importance of IRS's ability to detect quiet disclosures and evidence that they exist, we tested a different methodology to identify potential quiet disclosures, and found many more than IRS detected. Unlike IRS, we looked at all taxpayers who, for the tax years covered by the 2009 OVDP

filed amended or late returns, and

filed amended or late FBARs.

We then excluded 2009 OVDP participants from this population. While only an IRS examination can determine whether a potential quiet disclosure is an actual quiet disclosure, the 10,595 taxpayers that we identified have an unlikely combination of characteristics that could indicate that taxpayers are quietly disclosing. IRS agreed with our methodology as reasonable and appropriate. (See app. I for additional details about our methodology and app. VIII for a full breakout of our results.)

Although any of the 10,595 potential quiet disclosures could be actual quiet disclosures, certain subpopulations raised more questions. First, we found 3,386 taxpayers that filed amended or late returns, and filed amended or late FBARs for multiple years. Second, we found that 94 of these taxpayers met the same criteria for all six tax years covered by the 2009 OVDP.

IRS officials from the Offshore Compliance Initiative office told us that they had no additional work planned to identify potential quiet disclosures and had not yet decided to broaden the methodologies that they had tested, but they expressed strong interest in researching our methodology to identify taxpayers attempting quiet disclosures. We recognize that there are additional costs to using a methodology such as the one we used, but IRS has already committed resources to identifying quiet disclosures. Moreover, without rigorously and systematically searching for potential quiet disclosures, IRS does not have reasonable assurance that it is controlling such disclosures and collecting the delinquent taxes, interest, and penalties due. Exploring different methodologies that include a systematic evaluation of amended returns or late filed returns, along with amended or late filed FBARs, without too narrowly restricting either the amended return or the FBAR populations, and implementing the best option could provide this assurance.

Increases in Taxpayers Reporting Offshore Accounts May Also Indicate Attempts to Circumvent Some Taxes, Interest, and Penalties that Would Otherwise be Owed

Data from IRS's SOI division and from FinCEN show that the number of taxpayers reporting offshore accounts on Form 1040, Schedule B and the number of taxpayers filing FBARs has increased significantly in recent years. From tax year 2007 to tax year 2010 (the most recent data available), IRS estimated that the number of taxpayers reporting offshore accounts on Form 1040, Schedule B nearly doubled to 516,000, as shown in figure 4. From tax year 2003 through tax year 2007, only about 1 percent of all taxpayers filing Form 1040, Schedule B checked a "yes" box in response to the question asking if they owned or controlled a foreign financial account, but that share increased to more than 2.5 percent by tax year 2010. Furthermore, FinCEN has reported that the number of FBARs filed more than doubled, as shown in figure 4. Both the increase in the number of foreign accounts reported on Form 1040, Schedule B and the increase in FBAR filings are significantly larger than the approximately 39,000 taxpayers that came forward in one of IRS's offshore programs.

There could be legitimate reasons for these trends. For example, taxpayers could be reporting new offshore accounts or taxpayers who had always reported income from offshore accounts on their tax returns could be filing FBARs and reporting the accounts on Form 1040, Schedule B for the first time. This could be an indication of more taxpayers coming into compliance as a result of IRS's efforts to combat offshore tax evasion.

Source: GAO analysis of IRS Estimated Data Line Counts Individual Income Tax Returns for tax years 2003 through 2010.

[ADDITIONAL FIGURE OMITTED]

Source: GAO analysis of FinCEN annual reports.

Note: IRS Form 1040, Schedule B, Line 7a includes a yes/no question asking taxpayers if, at any time during the tax year, they had an interest in or a signature or other authority over a financial account in a foreign country, such as a bank account, securities account, or other financial account. The figure contains IRS estimates of the number of forms in which a taxpayer answered "yes" to this question.

Under the Bank Secrecy Act, U.S. residents or citizens with a financial interest or signature authority over one or more foreign financial accounts with a total of more than $ 10,000 are required to annually file form TD F 90-22.1 Report of Foreign Bank and Financial Accounts (FBAR) with Treasury. The FBAR must be filed for the calendar year by June 30 of the following year. The figures above are the number of FBARs filed during a fiscal year as reported in FinCEN annual reports.

However, such a sharp increase in foreign account reporting amidst the global economic recession and the publicity surrounding IRS's offshore programs raises the question whether some of these taxpayers may have attempted to circumvent some of the taxes, interest, and penalties that would otherwise be owed in the offshore programs. Unlike taxpayers attempting a quiet disclosure, who would still pay taxes plus interest on previously unreported income covered by the programs, and possibly an accuracy-related or delinquency penalty, these taxpayers would only be paying taxes on the offshore income earned for the year reported.

An IRS official from the Offshore Compliance Initiative office told us that although the office has coordinated with IRS's Planning, Analysis, Inventory, and Research (PAIR) office, they had not discussed Form 1040, Schedule B or FBAR filing trends, and that he was not aware of the sharp increase. As of January 2013, no projects were planned to research Form 1040, Schedule B filing trends. However, the Offshore Compliance Initiative office has asked PAIR to determine whether taxpayers who reported their offshore income properly, but had not filed FBARs, recently started filing delinquent FBARs, as directed by the 2009 OVDP instructions. This effort may not capture first time FBAR filers who are reporting existing offshore accounts as new.

Because the increase in recent years in Form 1040, Schedule B and FBAR reporting of foreign accounts is measured in the hundreds of thousands, we recognize that it may be too costly for IRS to audit all of those filings. A less costly approach could involve, for example, IRS drawing a random sample of those cases and auditing them to understand whether taxpayers are trying to circumvent some of the taxes, interest, and penalties that would otherwise be owed in the offshore programs. One of the things that IRS could look for in such an audit is the date that the offshore account was opened. Such a sample could provide an estimate of the magnitude of any problem. As was the case with quiet disclosures, without such information, it will be difficult for IRS to provide reasonable assurance that taxpayers are not reporting, for the first time, offshore accounts that had been open for years to avoid paying delinquent taxes, interest, and penalties.

Conclusions

Despite challenges in detecting offshore accounts, IRS's offshore programs have been effective in compelling taxpayers to disclose their unreported offshore income. Through these programs, IRS has collected more than $5.5 billion to date, brought tens of thousands of taxpayers into compliance, and gained increased information on offshore noncompliance. It is unclear how many additional U.S. taxpayers have undeclared foreign accounts and how much unreported income is associated with those accounts. However, the number of quiet disclosures IRS was able to find (some by accident), the number of potential quiet disclosures we identified, and the sharp upswing in Form 1040, Schedule B and FBAR filings all suggest that the amount of revenue to be collected from previously undisclosed offshore accounts could be significant.We found two key issues that, if addressed, could make IRS's offshore programs even more successful.

IRS has not used program information to identify populations of taxpayers that would benefit from education and outreach regarding their offshore tax reporting obligations. Such information could promote voluntary compliance and reduce the need for enforcement actions. Additionally, IRS does not obtain information on how taxpayers learned about offshore programs. Without this information, IRS cannot fully evaluate its efforts to promote taxpayer participation in offshore programs.

IRS may have missed taxpayers attempting to circumvent some of the taxes, interest, and penalties that would otherwise be owed in its offshore programs. Our methodology to identify potential quiet disclosures found many more potential disclosures than IRS detected. IRS may also have missed other attempts at circumvention by not researching the upward trends of taxpayers reporting offshore accounts for the first time. While there would be costs to such efforts, the amount already collected by the offshore programs suggests that considerable additional revenue gains might be possible. By identifying taxpayers attempting to circumvent some of the taxes, interest, and penalties that would otherwise be owed in its offshore programs, and taking appropriate action, IRS could potentially increase revenues, bolster the overall fairness of the program, and have a more informed basis for improving voluntary compliance.

16 comments:

Wouldn't it be a lot simpler if they issued some guidance, or a streamline program for US residents having foreign bank account issues - just like they have for Americans living abroad.

Don't they realize by now that the drastic penalties for minnows inside OVDP drives non compliance and that threatening more audits or more scrutiny of the people who try to get into compliance with QD or go forward is not really going to change things. It just instigates more FEAR. Instead, this new strategy is going to encourage people to STAY NON COMPLIANT and the IRS' only hope will be that these people will be discovered when the FATCA information exchange will start. Well, we're at least a couple years from that happening. If they were smart, they would come up with a program that would encourage people to come forward to get some revenue before the FATCA information exchange starts. When this starts, they'll have a lot of data to go after people.

When are they going to start to listen to the tax payer advocate? This is so frustrating.

Hummm... Very interesting. So, it would seem, that back in 2009, the QD or comply going forward would have been a very good one. As for now, with announced layoffs, Obama Care requirements, is the IRS really going to have the resources for pushing more folks into any of their VD programs and processing them expeditiously via a "more effective detect and pursue" program.

In an real compliance world, I would think they would love to have people come into compliance via the QDs without worry that they might have missed something. Do they want to "detect and pursue" QDs done for onshore tax failures too?

Be happy for the QD, is my opinion. Compliance for the long term is better, than spending a lot of time trying to develop strategies of "getting them". This is a bird in the hand, and forget the bird in the bush. Call the QD a success, and move on. It probably is not worth the effort.

They should spend their time on the education (especially with new immigrants) which they NEVER did before they started their jihad, and Congress should spend time on reducing the duplicative reporting of FBAR and FATCA form, and end Citizenship taxation for Americans living abroad, full stop!

Yeah, I am a US resident with a company provided offshore retirement plan and I had never heard of FBAR. All contributions to that plan were taxed as income, no distributions taken, and the balance is>$100k- 200k. No income from that plan. I also have a bank account from my home country opened for me by my grandparents that has about $15 of interest income a year, unreported. Penalty for joining OVDI is >40k (27.5% of high balance) - $40k for for less than $60 of untaxed income over the last 4 years. Even go forward is frigthening though, because of willfulness possibility, but even non-willfull is $10k per account per year - so that could be up to 40k per account per year.

I agree with your conclusion that the taxpayer must weigh the risks of: a) criminal liability; and b) willful FBAR penalty. However, I think you left out a very important factor: enhanced risk of examination if the taxpayer elects the "quiet disclosure" or "go-forward" strategy. Afterall, I believe the thesis of the report is "enhanced audit analysis will increase compliance and collection."

The report recommends to IRS that it change its audit screening analysis to flag taxpayers who: a) filed late or amended returns; AND b) also filed late or ammended FBARS. Since the IRS agreed with the GAO recommendations it seems to me that the existence of these two factors will likely result in an examination.

in other words, audit lottery is an option, but the presence of those "bad" factors will skew the odds of examination.

One interesting statistic is among those who had penalties above $1 Million in OVDP 2009 three were resident outside the US. 3 is 3 but it also was a rather low percentage of OVDP participants with balances above $1 Million. I am reminded the flurry of GAO and JCT reports that come out after the whole Kenneth Dart exit tax conflict in the late 1990s all which basically said no one outside the US complies with US tax law and the IRS has very few means ability to enforce it. Some of the language almost seems word for word similar to what the GAO said back then.

Roy, I do not believe that "enhanced audit analysis will increase compliance and collection." They may increase collection, but I firmly believe that such a policy will not increase compliance. People chose this option because they wanted to be in compliance and they don't want to get ruined in the process. Now, they tell them that the risk is much bigger. It's human nature to try to protect yourself and choose the solution that is going to be the least painful. The IRS is forgetting the psychological aspect of the problem. At that point, they're basically cornering people into doing NOTHING. After all FATCA is not yet in place and staying non compliant is a possibility that will not have consequences until FATCA information exchange starts. When that happens, with such a high percentage of non compliance, the IRS will receive millions of records. The odds of being audited at that point might not be better or worse than having come forward, especially for 'benign actors'. The only thing is that you'll be non compliant for longer, but the reasonable cause arguments will be the same.

I believe that the IRS would collect a lot more if they

1) educated people. In particular immigrants

2) Offered a real amnesty program. Same as OVDI, without the extortionate 27.5% of the high balance, or open the streamline program to residents. Basically what the taxpayer advocate recommended in her latest report to Congress.

Should they do that, I believe they would get millions in back taxes. And people would get compliant. A win-win. Instead, they terrify benign actors who are afraid of doing anything, when what most want to do is become compliant: a lose-lose. They want too much. They think that they'll get more revenue by hammering people with FBAR penalties, when in fact, they might get more by encouraging people to come forward without the fear or getting ruined. Why don't they understand?

Of all of the many options available, QD is usually chosen by those who believe they are smart and those who believe their crime is not that serious. Neither turn out to be true. QD is a suicide move compared to the other options.

Thanks for your comment. I disagree with your conclusion that QD is a suicide move. First, as the GAO report notes, the IRS is not picking up all QDs. Second, and more importantly, the only taxpayer for whom QD is a serious option is a taxpayer who, if all the truth were known to the IRS/DOJ, would not have serious risk of either criminal prosecution or the fraud-like civil penalties (civil fraud for income tax and willful for FBAR). A taxpayer with that profile should consider a QD or a go-forward, because, assuming the risk assessment is good, that taxpayer, if audited, will get at worst the accuracy related penalty for the open years and a nonwillful FBAR penalty (although the taxpayer should pay attention to the stacking of the nonwillful FBAR penalty). In short, that taxpayer will get the result he would have gotten by joining the program and opting out. To state that the other way, a person with material criminal prosecution risk (Dr. Schiavo's case) and the major civil fraud penalties (civil fraud for income tax and willful for FBAR) should do the OVDP and not opt out of the civil penalty regime in OVDP.

Finally, the only potential benefit of a QD over a go-forward is that the QD should qualify for avoidance of the accuracy related penalty which, in the overall scheme of things, is often not that material (i.e., the dollar amount may be significant even when it is not that material to the decision making process). No one can tell you whether the IRS is more likely to pick up the QD or the go-forward. As evident from the report, the IRS has systemic opportunities, if exploited, to pick up both strategies for audit. The IRS has said for some time that it is looking for QDs to correct returns to report offshore financial account income, although I suspect that there is some materiality factor involved, and the IRS can easily focus on delinquent FBARs which should have a statement of the reason for late filing. (Taxpayers need to be careful in drafting that statement so as not to create more problems than they solve; lying to or misleading the IRS can be a separate criminal act.) All things being equal, the go forward is the strategy for the taxpayer with the right profile (outlined above). Even here, the IRS can pick up first time filers, although the IRS and FINCen for some reason have not required filers to answer key questions (possibly framed in a number of ways such as "Did you have foreign financial accounts with an aggregate amount exceeding $10,000 in any of the past five years for which you did not file FBARs?" And, the follow through, "State the years and your best estimate of the aggregate amounts that should have been reported."

Thank you for posting this very interesting report. I know you can't give any legal advice here but I'd just like to get your personal opinion.

I have a slightly convoluted situation. I opened an HSBC India savings account in 2008. Until 2011, I had not heard of FBAR and I never bothered to check any interest accrued in the account. The max balance over these years has been about $14000.

- In 2011, I filed delinquent FBARs for 2008 and 2009. I attached an explanation saying I'm non-resident alien in the US and hence was unaware of this form.- For 2010 and subsequent years, I filed the FBARs on time and showed the interest income on my returns.- The issue is about $10 of interest income for 2008 and about $400 on 2009. Also, schedule B needs to be amended for both years.

Being a long-time reader of your blog, I know your take on "material" chances of prosecution. I'm weighing my options as:- Do a quiet amendment. Would my amendment qualify as QAR still given that HSBC India was served with John Doe summons?- If I wait until 3 years since filing 2009 return, wouldn't the statute of limitations on audit close? If so, I can just amend and pay any penalties without risk of audit.- Do you recommend closing the account and repatriating the money through wire transfer?- As I can't do OVDP now (John Doe summons), would any civil penalties involve any charges that can affect my future immigration status in the US? You said in an earlier comment that FBAR penalties can be looked up by USCIS agent adjucating on the I-485 application. If FBAR penalty (tax accuracy, underpayment, interest etc.) is civil and not criminal, wouldn't that be a non-issue?

I have looked in vain among all discussions and reports for case histories and anecdotes of Americans and dual nationals resident abroad, including those who have tacitly abandoned (or never documented) their US person status. One wonders how, tax treaties notwithstanding, treaty partner countries will assist the IRS as against their own citizen-residents. I mention this because renunciation of US nationality has become increasingly difficult and expensive and (remembering cases of former citizens whose US nationality was retroactively restored by the US Supreme Court, Rev. Rul. 75-357, PLR 8138071 provides that at least in pre-1976 cases the IRS will not assert a tax claim against those who have not availed themselves of an attribute of US nationality).

What of, for example, a person born abroad whose US parent(s) never registered the birth? Except for an unmarried father, the child's US nationality does not depend on registration at any particular age (although where the child is over 5 the case must be referred to Washington as a fraud countermeasure). Van DeMark v. Toronto Dominion Bank, 68 O.R.(2d) 379 (Ont. H.C.J.) is instructive (IRS seized assets from NY branch of bank; Canadian court forced the bank to repay its depositor in Canada notwithstanding).

If FATCA obliges foreign banks to ascertain a possible US Person status of each depositor and signatory this can cause conflict with the International Law rule that it is for each State to determine who are its nationals and every State can treat a dual national within its state as solely its own national. The recent arrest of certain bankers arriving in New York as tourists must give pause to those who worry that the IRS has them in its sights.

So if a client has an undisclosed offshore account that is 10 years old they can only do amended returns on the past 3 tax years.

In my opinion, if an account is older than 3 tax years then you really have to look at the reasoning for wanting to do a QD. By submitting amended returns for the past 3 years, admitting the account exists, then you are wide open on the other 7 years (ignoring s.o.l).

Jack's reply interpreted my original comment correctly and that was: Of the two options, QD or "Go Forward", I believe QD to be the riskier.

You asked what your options are based on John Doe summons. You need a lawyer... not an internet message board. Speaking generally: leave the country, "go forward", wait to see what happens, or a combination of both. If you are truly a minnow and a non-US citizen you have options that native born people simply do not have. Speak to a lawyer and try the "un-informed immigrant" route.

Jack: wouldnt the "go forward" strategy by itself increase the risk of being assessed a "willful FBAR penalty"? That is: if the IRS finds out that your account has been open for a while. Granted that they dont ask this question anywhere today, but as far as I know, there is no statute of limitations on an FBAR that you didnt file. So, they might ask this question in the future. Alternately, if your bank is one of the banks that participates in FATCA, they might get information about you even if you dont disclose it.

In this case, wouldnt it be safer to do a QD (for the person with the right profile, like you say)?

Willfulness is determined as of June 30 of each year, if the deadline passes and you did not file. Filing a late FBAR doesn't change the past. But I would think that making an effort to fix the past by QD vs. go forward might make you look better. And then again it might not make a difference, since the government doesn't seem to be rewarding those who make a disclosure (of whatever type) before the government knows of the account, versus those who wait at the last minute until there is a news report that their bank is about to share the information.

The SOL of FBARs is six years.

FATCA reporting covers information generated once FATCA enters into effect; there would be no automatic reporting covering previous years. So basically FATCA would report the same info as you would be reporting on a go-forward basis. The IRS might be prompted to dig back based upon the information provided, but I would think this would be as likely whether the information came through go forward or through FATCA. Or it might be more likely if the information was obtained through FATCA and there had been no prior go-forward disclosure.

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